Tuesday, September 7, 2010

* Euro falls as Europe banking concerns rekindled
* Widening spreads for peripherals also pushes down euro
* Yen rises to 15-year high versus dollar
* Yen, Swiss franc rally on growing risk aversion (Recasts first paraqgraph, updates prices, adds details of yen record low)
By Nick Olivari
NEW YORK, Sept 7 (Reuters) - The yen rose to a 15-year high against the dollar and the euro slid across the board on Tuesday as rekindled concerns about the European banking sector renewed risk aversion.
The yen and Swiss franc, seen as safe havens, rallied as risk aversion was spurred by a Wall Street Journal report highlighting the shortcomings of European bank stress tests in July.
This followed comments from Germany's banking association on Monday that the country's 10 biggest banks may need 105 billion euros of additional capital under revamped rules. [ID:nLDE6850Q9]
A fall in German manufacturing orders in July added to the single currency's woes. [ID:nBAF004244].
Worries about the banking sector also saw yield spreads between peripheral euro zone government bonds and their German counterparts -- considered the safest in the euro zone -- widen, with Portuguese and Irish spreads in focus.
The cost of insuring those countries' debt against default also rose, further chilling demand for the single currency. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on the euro and euro zone bond yield spreads: r.reuters.com/bev79n ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
"The market has been able to give full attention to the negative European developments," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
These include new questions about the stress tests, concerns over the amount of capital that will need to be raised under Basel III [ID:nLDE6850Q9], and reports suggesting euro zone governments will seek to raise 100 bln euros this month, roughly twice the amount raised in August, Chandler said.
In early New York trade, the euro EUR= slipped 0.9 percent on the day to $1.2762. It fell as low as $1.2736 on Reuters data, off a three-week high of $1.2920 hit on electronic trading platform EBS on Monday EUR=EBS.
The focus was turning to significant option expiries on Thursday, when an estimated 1 billion euros are set to roll off at $1.2600.
"We've seen the euro's correction since June take it to the $1.30 region, and people are getting worried about more negative news about the euro zone banking sector in the third and fourth quarter," said Chris Turner, currency strategist at ING in London.
Against the backdrop of mixed signals from Japan, the single currency EURJPY= fell 1.5 percent on the day to 106.71 yen. The Japanese currency rallied across the board, last pushing the dollar JPY= down 0.7 percent to 83.57 after going to a 15-year low of 83.51 on EBS JPY=EBS and 83.52 on Reuters data.
Earlier in the trading day, Bank of Japan Governor Masaaki Shirakawa said monetary authorities could not control forex rates, increasing speculation Japan was not preparing to act to stem yen strength at the moment. [ID:nTOE68606B] "(Shirakawa) has essentially ruled out intervention in the near term," CitiFXWire analysts said in a client note adding that the statement helped to encourage yen bulls.
Shirakawa's comments followed the BOJ's decision to hold off from additional monetary policy easing. [ID:nTOE68602K]
However, Japanese Finance Minister Yoshihiko Noda on Tuesday said the government would take firm action on currencies when needed, saying recent moves were clearly one-sided. [ID:nTKX006976]
"The risk of intervention is great, but this will only slow the appreciation rather than cause any trend reversal," said BTM-UFJ's Hardman.
The market's focus on risk aversion also boosted the Swiss franc, pushing the euro EURCHF= 1 percent lower to 1.2893 francs. The dollar CHF= was down 0.2 percent at 1.0102. The Australian dollar AUD= was down 0.4 percent at $0.9136, hurt by general lack of risk appetite and as the ruling Labor Party secured enough numbers to form a minority government [ID:nSGE6850I3]. Labor's return to power rekindled talk the government would press ahead with a tax on mining company profits.


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